Play it safe or seek growth? While overseeing the company retirement plan, it may be tempting for plan sponsors to take an overly cautious stance with the investment options. On the other hand, the lure of great returns for all can be tempting. Experts advise: avoid the extremes of both too safe and too risky when it comes to signing off on the investment options.
Benefiting Participants
Of course the end goal of a retirement plan—and the duty of it’s fiduciaries—is to ensure participants benefit. Fear of losses (not to mention lawsuits) can spur a scaling back of investment options, but this is unlikely to be the most beneficial approach for participants. As fiduciary experts point out:
In the effort to scale back the number of options, every once in a while plan sponsors will just do something that’s odd — on both sides of the spectrum.“I have seen plan sponsors try to avoid any liability associated with market risk by severely limiting the choices that participants have available to invest their company contributions,” says John Shrewsbury. Co-owner of GenWealth Financial Advisors in Little Rock, Arkansas. “Some employers go as far as only allowing those contributions to go into fixed interest accounts. By trying to limit their market exposure, the employer is often limiting the long-term gain that higher-risk investments could offer. A well-educated workforce can effectively navigate investment choices and decide on their own whether they want to invest safely or take more risks.”
When making decisions, keep in mind: no matter what investments a plan offers, how carefully they are chosen, how the decisions are documented and how diligently the protocols for monitoring fees and returns are implemented, retirement plan sponsors can still face allegations of a fiduciary breach. Protection from personal Liability is best practice and Colonial Surety offers an efficient and affordable Fiduciary and Cyber Liability Insurance Package that includes:
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How Much Growth?
While curtailing investment choices too much is not a good plan, the opposite is also true: aggressive growth options can be very dangerous for retirement plans. Experts at Fiduciary News caution against letting the “pendulum swing” to far to either extreme:
“The most unusual mistake I have seen was an investment menu with almost all of the stock funds offered categorized as Growth funds, including multiple Mid Cap Growth funds,” says Jeff Coons, Chief Risk Officer at High Probability Advisors in Pittsford, New York. “Of course, this was after several years of growth outperforming value. The solution is to start with menu categories rather than funds. This avoids a menu becoming unbalanced when one particular style has been performing well.”
Fiduciaries must also keep the fees in line when monitoring the progress of the plan. Claims of “excessive and unreasonable” fees—which go unchecked by the plan sponsor—are at the guts of the continuing swirl of ERISA lawsuits working their way through courts, with a recent complaint stating: “The direct and indirect payments defendant caused the plan, participants, and beneficiaries to make for recordkeeping and administrative services during the class period were excessive and unreasonable….Defendant breached its duty of prudence by failing to monitor, control, negotiate, and otherwise ensure that indirect compensation plan participants’ pay [was] not excessive and unreasonable.”
Plan sponsors are also reminded that even with great diligence, errors and oversights occur, and breaches—like failure to adequately monitor service providers—can result in costly allegations. That’s why it’s unwise for plan sponsors to take unnecessary risks. The annual cost of Colonial’s Fiduciary and Cyber Liability Insurance is less than the fee for one hour of expert legal defense if a lawsuit or regulatory challenge strikes. Get covered, in minutes, today:
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